Corporate Taxation Madoff - PDF by sgw19866


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									February 24, 2009

Honorable Gary Ackerman
House of Representatives
2243 Rayburn House Office Building
Washington, DC 20515

Cc:      Congresswoman Carolyn McCarthy
         Congressman Steve Israel
         Senator Charles Schumer


Dear Congressman Ackerman:

First, on behalf of Madoff, a website community and blog dedicated to helping
the Madoff community, I wish to extend my appreciation for your efforts, and those of
your colleagues regarding the Madoff fraud. I am writing to ask for additional leadership
and action. To this end, I am enclosing specific suggestions and recommendations, one
set of which applies to making whole the losses to Madoff victims, and another
alternative option set which could provide relief through a variety of actions. I believe
that my background as both financial planner and investment adviser, as well as having
personally witnessed the devastation wreaked by this fraud provides additional standing
to the arguments put forth. I also wish to add that today I became aware of, and
appreciate your letter to the Internal Revenue Service. I enthusiastically look forward to
further conversations in this matter.

I wish to state my position from the outset: that the Madoff situation is not akin to other
“hedge fund” scandals and unregistered security Ponzi schemes – that the essential nature
of the investment fraud, although perpetrated by Mr. Madoff, was enabled by acts of
omission and commission by agencies of the US government, as you have well identified.
Ironically, had the government and its agencies not been “regulating” the Madoff entities
– i.e. had BLMIS been an unregulated hedge fund, for example -- far fewer investors
would have participated, the investors would have been limited to those accredited
investors with the financial wherewithal to participate, and far fewer charities would have
participated. No hedge fund would have grown to this size. The government was
(hopefully) unwittingly complicit in this fraud, and fairness dictates a more pro-active
approach which seeks proper restitution. The words “bailout fatigue” that Madoff
investors have heard around Congressional circles are distressing and insulting, given the
enormity of this scandal, the extent of governmental responsibility, and the limitations
posed by sovereign immunity.

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While we hope that Congress attends to the problems that led to this debacle, we
respectfully ask you now to step up and help resolve the situation. We need clarity and
decisiveness, and we need extensive help more than words. The public investigations are
a step in the right direction, but victims are still left hanging.

Furthermore, it is my grave concern that Congress will take the path of least resistance,
one that will leave the Madoff Trustee the widest range of discretion, that will limit the
recourse to a somewhat lenient Internal Revenue Service regarding the amending of
returns, and not meaningfully make whole the thousands victimized by Bernard Madoff
(via a fraud enabled by agencies of the US government). In other words, IRS leniency,
while most helpful, is but a drop in the proverbial bucket, and not the best solution.

While the government is spending hundreds of billions seeking to help restore confidence
in our financial system, we feel that your leaving the victims of the Madoff scandal
largely damaged will lead to further distrust of the financial system. Moreover, the tax
and legal consequences and remedies are stunningly murky and bypass so many who
have been devastated. The limitations of SIPC coverage, the possibility of claw-back, the
inability of many victims to recover any value are just a few aspects heaping insult upon
injury. Making investors whole is frankly essential to rebuilding a trust in the financial

The fairest and most appropriate approach, in our opinion, would seek to make whole the
Madoff investment community. Making whole emphatically does not mean making sure
investors obtain their principal back. That is little comfort to those in retirement who
have been relying on income from their Madoff investment over the years, charities that
have been using those funds for charitable purposes, or individuals who for years were
mandated to make withdrawals from their IRA accounts. There was a significant
opportunity cost for those funds. Had the government and/or its agencies properly
undertaken their responsibility in the early 1990’s, these funds would have been moved
out and invested elsewhere – perhaps in S&P 500 equities, corporate bonds, CD’s, what
have you. There is strong legal precedent for this position. “Making whole” means either
restoring the notional value of investors’ November 2008 statements or providing a fair
rate of return to the principal of the investment for the period invested.

Moreover, the enormous legal and accounting entanglements argue strongly for
comprehensive reimbursement of the November 2008 statement values of investors. The
costs to investors and taxpayers will be enormous as the IRS repays investors for “false
profits,” enormous audit and legal costs for Internal Revenue and investors, etc. The
massive ancillary financial costs of this situation will total many billions of dollars,
leaving only accounting and legal firms winners. Moreover, the heaping of additional
emotional pain on victims in the tax courts, via Trustee lawsuits, and even between
injured Madoff victims borders on the immoral. It can only be alleviated if action is
properly taken now.

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We realize that in the current environment for Madoff investors who are anxiously
seeking immediate IRS guidance that this comprehensive solution may not be the first
step, but it is an essential issue nonetheless. A list of supplemental steps is also attached
in light of this.

We ask that you urgently consider these actions, forge together the necessary alliances
and, out of recognition of the government’s wrongdoing in this situation, take the correct


Key steps to take now:

1. Indicate your resolve to stand with your Congressional colleagues and assist
those individuals, foundations and institutions that have been victimized by the
Madoff scandal right away.

2. Announce your intention to fully reimburse all US investors for their losses, as
determined by the notional value of their investments as of 11/30/2008.

3. Take immediate action to modify bankruptcy regulations to clarify for the
trustee the inappropriateness of claw-back in this case. Both Federal and NY State
bankruptcy codes are absurdly murky and leave far too much discretion to the
Trustee, who will invariably move to recover “profits”, “principle” or both.

4. Initiate whatever action is necessary to provide the necessary resources to the
regulatory agencies to prevent this from happening again. I would like to suggest
that FINRA is most likely not the appropriate regulatory agent.

By taking this approach, you will help mitigate the enormous anxiety and truly assist
your constituents. This is not only the fairest and simplest approach, in the long term, it
makes economic sense. Critically, you will reduce victim’s legal and tax costs, provide
restitution for needy charities and foundations, avoid costly lawsuits against the
government and regulatory agencies, and reduce the enormous amount of time that
Internal Revenue and state agencies will be spending to resolve the amended tax returns
and court costs. Equally importantly, this will help to restore confidence in our
government’s commitment to protect our regulated markets.


While we feel that the best and most cost effective action would be full
reimbursement of the values in US Madoff accounts, there are other steps we ask you
to consider at this time for US investors.

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Regarding a series of actions that would be helpful, but likely fall short of fully
reimbursing investors, there are numerous approaches. Frankly, we recommend the
creation of a panel of individuals of diverse expertise – a Madoff Task Force -- to
work with existing Federal agencies to assist with identifying the different options,
opportunities and long term implementation. The following are intended as
guidelines, however, for rapid action.

1. PUBLIC COMMENT. Indicate, again, your resolve to assist those individuals,
foundations and institutions that have been victimized by the Madoff scandal right
away by vouching for the solvency of SIPC to pay claims to $500,000, indicating
leniency and expediency by Internal Revenue, and minimizing claw-back to those
investors who did not take complete “bad faith” redemptions over the last 90 days
to 1 year. A public position on both these issues is important.

2. IRS. Work closely with Internal Revenue to provide the maximum possible
recovery of loss based on the most current statement (notional) value either by
lenient, “one-off” interpretation of the very tax code and/or by providing modifying
legislation. For example, require the IRS to allow maximum recovery going back the
full length of the investment, eliminate the 10% AGI limitation requirements, and
extend backward the statute of limitations indefinitely. Provide flexibility so that
the taxpayer can choose an approach that best optimizes their particular tax and
income circumstances. In addition, create a simple amending process so as to
minimize paperwork and time for filers and administration.

3. IRS. Require that the IRS execute refund payments to victims within a short
window of time – perhaps within 60 to 90 days of request -- and insist that
documentation demands and audit practices be made public, be consistent, be
within a certain time frame and be minimally intrusive. A similar approach should
be taken by the SIPC Trustee.

4. IRS. Permit the deduction of IRA and retirement-plan based losses as ordinary
theft losses in the same manner as other Madoff losses. Refunds should then be
either rolled over to IRA or qualified plans within 60 days to avoid immediate
taxation as a distribution, or refunds taken as a distribution and taxes paid
accordingly as they would be on any retirement distribution.

5. SIPC. Provide sufficient funds to SIPC to cover each loss not just to the $500,000
limit amount established in 1970, but increased (even if temporarily) based upon an
inflation adjustment, or to $2,000,000-$3,000,000. The original value of the SIPC
guarantee is now worth a mere $91,000 in 1970 dollars. If SIPC is not the
appropriate entity, create an auxiliary fund for this purpose.

6. SIPC CLAIMS & TRUSTEE. Redefine “basis” for the Trustee. Ideally, claims
should not be based on “money in minus money out,” as the Trustee has proposed,
but should be based upon either most current statement values or an amount that
includes the opportunity cost factor of money. The latter is used extensively in many

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legal situations and has ample precedent. In other words, the investment principal
would have been invested elsewhere with a rate of return. Several legal rate
methodologies currently in use by the IRS and other agencies can be selected from
to do this. While both approaches (using statement values or incorporating a rate of
return factor), in fact, have valid precedent, the ambiguity of the code will lead to a
punitive approach by the Trustee as it currently stands and this must be avoided.

7. CLAW-BACK. Provide immediate and clear direction to the Trustee, and
provide necessary legislative direction to disallow any claw-back by the Trustee or
to offset such claw-back, except in cases of total account redemption within the last
year or shorter period. Claw-back must not apply to either principal or “profit”
except where “bad faith” clearly existed with respect to complete and large dollar
amount withdrawals. The anxiety being felt by small, long-term investors is being
magnified by the Trustee’s comments and the Bayou case (the latter is not fully
appropriate as precedent and was a disaster in administration). As there is a
difference between Federal and State bankruptcy laws and interpretations, seek to
establish congruency immediately.

coverage to those not-for-profit entities that invested in Madoff via feeder funds.
The Trustee is currently taking the position that SIPC is not a recourse for indirect
“feeder fund” investors. Recourse must be provided either through SIPC or other
means to at least make whole those entities engaged in legitimate charitable

9. FEDERAL & STATE COHERENCY. Work with appropriate state entities to
provide consistency between Federal and state actions, both in terms of bankruptcy
law and tax code.

10. FOLLOW UP & IMPLEMENTATION PANEL. Provide subsequent follow up
relief to find a mechanism to make victims as close to whole as possible. This may
take time, but a deadline should be set for a panel to look back at the compensation
efforts of Madoff victims thru 2009 and 2010 to insure fair and appropriate relief
had taken place.

11. FIX THE CAUSE. Clearly, take whatever action is necessary to provide the
necessary resources to the regulatory agencies to prevent this from happening again.

In closing, lives of Madoff fraud victims have been upturned at the worst possible time,
while victims remained frightened and anxious about what may yet happen. The path of
least resistance is not the best path. Existing laws – bankruptcy and tax – are woefully
inadequate. Mindful of the enormity of the financial challenges facing Congress and
Americans at this time, we implore your taking the right course, the fair course. Again,
the government’s acts or inactions significantly contributed to this “human tragedy.” It is
only fair and right that amends be made, and help provided that benefits all classes of
fraud victims.

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Thank you for your kind consideration. We remain available and at your convenience for
any additional exchange that might be fruitful. Again, thank you for your forthrightness
and efforts in this regard.

Most Respectfully,

Ron Stein, CFP
Good Harvest Financial Group

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